HMRC crackdown on freelance tax dodge used by BBC and civil servants

The taxman has started cracking down on a loophole that allows thousands of
civil servants and BBC workers to pay lower rates.

Figures show that the amount of money recovered by HMRC from investigations into the suspected underpayment has increased fivefold in the past year, to reach more than £1million.

Officials have also doubled, to reach more than 50, the number of probes into alleged abuses by employees who set up “personal service companies” in order to pay corporation tax rather than paying income tax and National Insurance through the PAYE system.

The new focus on the tax law aimed making sure freelances pay their way, known as IR35, comes after it emerged that more than 2,000 senior Whitehall officials and 150 BBC presenters were being paid “off the books”.

Martin Casimir, managing director of Bloomsbury Professional, the business publishers that uncovered the new figures, said: “The crackdown on IR35 fits in with the wider picture of HMRC taking a much more aggressive approach to all sorts of tax cases where it suspects it is missing out on tax revenue.

“It looks like HMRC has been playing catch-up on IR35 in the past year. They’ve gone from almost ignoring IR35 breaches to getting tough around the time that the public sector personal service company scandal began to break.”

Staff on company payrolls pay up to 50 per cent of their salaries in income tax while they and their employers must also contribute to National Insurance.

By contrast, freelancers who are paid through “personal service companies” pay corporation tax at just 21 per cent, and are exempt from NI contributions.

In the past year it has emerged that thousands of senior public sector workers, and hundreds more who work for the licence fee-funded broadcaster, are employed on this basis.

In many cases this is a legitimate arrangement if the freelancer works for a large number of firms, but there is growing evidence that many people who just have one employer are also paid “off-payroll”.

HMRC believes that it could recover up to £50m in unpaid tax going back several years, as well as the same amount interest and penalties, by ending these suspected abuses of the system.

The new figures, obtained under Freedom of Information Act requests, show that in 2009 HMRC carried out just 12 investigations under IR35, the Labour law that allows the authorities to tax freelancers at a higher rate if it is believed that they do actually have just one employer.

The following year the figure had doubled to 23 and in the most recent financial year, 2011-12, it more than doubled again to reach 59.

In 2010-11 these investigations raised just £219,000 but the following year they brought in £1.25m to the Treasury.

A spokesman for HMRC said: “HMRC robustly tackles tax avoidance and works hard to ensure that people pay the right amount of tax at the right time.

“We have strengthened our specialist teams who enquire into IR35 cases and will further increase coverage in 2012/13. Whether IR35 applies is always based on the facts of the case. HMRC does look behind the reality of the arrangements to consider whether a relationship is one of employment.

“We have been reviewing our approach to IR35 since 2011. In addition to making more enquiries, we have issued new guidance to help to make the IR35 rules easier to understand, and we operate a dedicated helpline to assist customers to understand their legal responsibilities.”